There have been a handful, and 944 Lake Avenue (up near St. Barnabas) is one of them, closing January 8th for $3.975, not too far from its original 2005 asking price of $4.5 million. A nice Coggin’s colonial reproduction (that would mean low ceilings for you basketball players out there) set on very nice meadows, so someone has done well for themselves, but how about the seller? I’ll leave it to readers like CEA to do the math, but I can’t believe it was worth waiting 3 1/2 years to get this price when a lower price would have yielded cash sooner.

But hey, it’s their decision.

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*sigh* OK, I’ll get out the calculator.

They waited 3.5 years to get $525,000?

Let’s say they sold it quickly (as would be expected in 2005) for $4 mil.

They could have invested it at 4% (which, according to my Bloomberg, is where 6-month T-bills were in 2005) and made $560,000, tax-free, over those 3.5 years.

You then have to add in what is probably $20,000 of taxes over 3.5 years ($70,000), and – to be fair – maybe $10,000 per year of maintenance? So $100K all-in for taxes and maintenance?

So they spent at least that $100,000

and sacrificed a government-guaranteed 560,000,

Therefore: $660,000 total out the door – all to wait for a taxable $500,000 which never came.

CEA

Thanks – knew I could count on you!

Chris, I know I have done this math before: the general rule of thumb seems that for every year you wait it out, you physically lose 5% of your asking price:

So even here:

$660,000 = $188,000 per year, which is about 5% of $4 mil.

OH crud, this is what happens when I do math before my second cup of coffee.

I assumed that the seller had paid off his mortgage. If he was paying a mortgage during this 3.5 years, you can add that onto the amount.

Let’s say he borrowed 50% of his, say, $3 mil purchase price (do you know where he bought it?), and was paying, I dunno, 6%.

That is $1.5 mil x 6% x 3.5 years = $315,000

So…

You PHYSICALLY, cash out of pocket, lose $315,000 + $100,000 = $415,000

Your OPPORTUNITY cost, the money you would have made in plain old T-bills, is $560,000

So the number is much, much worse than $660,000; you have to add in the mortgage payments the seller was likely making.

It’s more like $1 mil that he sacrificed waiting around for $500,000. Penny-wise….

CEA

Or they could have bought Citi, Lehman, or Bear stock. Or they could have bought the broader market indices. Or they could have put it into Madoff.

Maybe waiting was ok.

Oh golly, Happy Reader, and maybe the seller could have gone skipping off with unicorns and chased rainbows too!

Ah, I got this deal on unicorns – you’ll get monthly statements showing how many I’ve bought for you, where they’re pastured, and everything!

Walt N

CEA – If you are going to include the mortgage payment, you need to give the seller the benefit of not paying rent/mortgage/down payment on another home as well as the fact that they would have probably bought something else at the peak of the real estate and stock market

CEA,

Is it fair to restate your postion as follows, “Selling 3-1/2 years ago for $4 million would have better than selling today for $3.975 million?”

Inagua:

My position is: “Selling 3.5 years ago for $3.5 million would have been better than selling today for $3.975 million”.

Waiting to Buy:

We don’t know that the seller stayed there the whole time. If he did, then great – I am happy to take out the WHOLE mortgage payment. Fine with me. It is still $660,000 in the hole.

CEA,

Thanks. Now I understand the numbers. So he made about 5-1/2% a year by waiting, before expenses.

Inagua: I guess I am not following your math.

Had he sold 3.5 years ago:

He lost $100K/year on taxes and maintenance

He lost $420K that he could have gotten by investing his proceeds in T-bills (assuming a $3.5 mil sale price, which would be low. He probably could have sold for $4.0 mil in 2005, which would be $560K)

So the range is $520K – $660K he forfeited by waiting to sell. And top this off with: he was likely paying a mortgage on that property.

Look – I just work the numbers. I don’t know the seller from a hole in the wall. If you think he made the right move, then by all means – follow his example. It doesn’t affect me.

It has been that, in my financial experience, if you want to sell, you find the price and make the deal. If you want to screw around for 3 1/2 years, showing your house, staying someplace you no longer want to be (or holding onto an empty house because you have already moved), then it is your agita.

I am not a fiscally risky person. I would, personally, have rather have had the $3.5 – $4.0 million in my hand. Life is too short to waste it angst-ing that maybe, maybe you coulda “done better” by holding firm.

It seems to me that there are very, very few examples (even prior to 2007) where holding on to a high price was in any way beneficial to the seller.

Food fight! Food Fight! Inagua, are you gonna let her get away with that?

CEA,

Internal rate of return is the standard way of measuring investments. In this case, $3.5 million to $3.975 million in 3-1/2 years works out to a annualized return of about 5-1/2%.

Like you, I just work the numbers, and this is what the numbers say before expenses.

FWIW, I’ve owned and sold six homes, and I hit the first bid every time without countering.

Okay, that was great, Inagua. Now, CEA? Time for that folding metal chair! Come on! Smash the guy! (Right after this break for commercials)

*sigh*, and I had SUCH a nice time going out to dinner.

There are two things to consider, Mr. “In Water”:

1. 2005 was a SIGNIFICANTLY better year for real estate than 2008. If the house sold for $3.975 today, obviously, the owners could have gotten that 3 years ago. I used $3.5 as a huge exaggeration.

2. There is a really basic concept: “Gross” vs. “Net”. Your “Gross” $475,000 cannot be accurately compared to my “Net” (after taxes and maintenance) $520,000.

So let’s “Net” your number for the same expenses, so we can compare apples to apples:

$475,000

– $100,000 (3 years taxes and maintenance)

– $28,500 (6% commission on the excess $475K)

= $346,500

In my world, $520,000 > $346,500.

QED

Thanks,

CEA

and if you want to do it the IRR way – again, you must compare net numbers to net numbers:

$3.5 million = cash in hand in 2005. In 2008 dollars (3.5 years), what assumed rate of return would you like to give? I’ll low ball and say 4% (T-bill rate).

And again, you had to pay $100,000 in taxes and maintenance for 3.5 years, plus 6% commission on that extra $475,000 so your realized amount is:

$3.975 – $0.13 = $3.845

According to my HP12C, the IRR is 2.7%.

4%>2.7%

QED II

This is all really ridiculous, because the major argument is: if it sold for $3.975 today, it clearly would have sold for that in a superior market 3 1/2 years ago. Inagua, it was a mistake for the seller to wait. Any way you want to look at it. See you back at Clusterstock.